National Audit Office said breaches included “irregular credit guarantees”, “irregular collateral” and “fraudulent and underpayment of registered capital”.

There are growing concerns about the amount of bad loans being held by local governments.Official figures show they held debt of 10.7tn yuan ($1.7tn; £1.1tn) in 2010.

“The State Council is studying proposals to enhance local government debt management and to address fiscal and financial risks,” the audit office said in the report.
‘Again and again’
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A lot of the local debt will be absorbed by the central government”
Michael Pettis Peking University

Local governments have been borrowing money from Chinese banks to fund projects aimed at maintaining economic growth.

According to the China Banking Regulatory Commission, local governments took up 80% of total bank lending in China at the end of 2010.

However, analysts said that although the lending had helped to spur investment and boost growth, it was now weighing on local governments.

“Whenever you look at lending that spurs growth miracles, it starts off with an increasing ability to pay the debt,” Professor Michael Pettis of Peking University told the BBC.

“But in every case that ability fades. That is the process that is happening in China,” he explained. “We are going to see stories like this again and again.”
Easing burden?

In October last year, China allowed four local governments to sell bonds for the first time in 17 year. It was hoped the sale would help them pay their loans.

However, the central government put a limit on the amount of bonds the local governments could issue despite the fact that there was a lot of interest among investors.

According to the Xinhua news agency, Shanghai’s bond sale received bids for three times the amount of bonds on offer.

As a result, many of the local governments still have sizeable debts and while the central government may let them raise money, it may also have to take further measures to solve the problem, analysts said.

“A lot of the local debt will be absorbed by the central government,” said Mr Pettis of Peking University.

Oil prices jumped 4.2% to settle at $102.96 a barrel. That’s the highest closing price since May 10, when prices ended the day at $103.88 a barrel.

The Strait of Hormuz is a critical shipping lane, with 17 million barrels of oil per day passing through in 2011, according to the U.S. Energy Information Agency.

That’s about one sixth of global oil production and nearly 20% of all the oil traded worldwide. Iran itself only exports about 2.2 million barrels of oil a day.

Just last week, Iran issued its initial threat to shut the shipping lane linking the Persian Gulf with the Gulf of Oman. Iran’s southern coast borders that entire area.

“If Iran oil is banned, not a single drop of oil will pass through Hormuz Strait,” Iran’s 1st Vice President Mohammad Reza Rahimi said at that time, according to the Iran State News Agency.

The new Iranian threat followed increased sanctions from Western countries to limit the amount of oil that Iran can export. In particular, the U.S. government tightened restrictions on companies that provide Iran with equipment and expertise necessary to run its oil and chemical industries.
Iran test-fires missiles – CNN

Beutel said that Iran increased tensions in the last couple of days by launching missiles capable of striking targets on land and sea.
Merrill Lynch has projected that a shutdown of the Strait of Hormuz could cause a $40 spike in oil prices.
However, in order for Iran to choke off the strait, its military would have to take on the U.S. Fifth Fleet, which is based in nearby Bahrain.
Iran’s military spending is equal to only 2.5% of its gross domestic product, according to the CIA. So it’s not a given that Iran has the firepower to take on the United States, a much larger country that spends more than 4% of its GDP on the military.
“[Shutting down the strait] won’t happen because the U.S. can’t allow it to happen and Iran knows this,” said Dan Dicker, a former oil trader and author of ‘Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy.’
“The Iranians rattle sabers every other Thursday,” said Dicker, though he added that Iran’s posturing could still add fuel to a volatile situation and drive up prices.
“The geopolitical climate on oil is fragile as hell and there’s not a lot of capacity,” said Dicker, who projects that oil could rise to $125 a barrel this year.
Early last year, uprisings in Libya led to oil production disruptions and surging oil prices. Prior to the unrest, Libya was producing roughly 1.6 million barrels per day, compared with Saudi Arabia’s current daily output of around 9 million barrels per day.

Oil prices stayed above $100 for nearly 12 weeks straight before easing back. And Libya’s production is still nowhere near its pre-unrest levels.